Meta-models of the Phillips curve and income distribution

Abstract

This paper reconsiders the flattening of the Phillips curve that has taken place over the last twenty-five years, together with the recent claim that a wage-price spiral could ignite an inflationary process. The two aspects are interrelated. The time-variation nature of the parameters plays a fundamental role in feeding a process of instability that may affect the reappearance of inflationary episodes. This paper first examines the extent of the U.S. Phillips curve flattening and nonlinearity by comparing the results of different econometric specifications and models. Based on these findings, the use of a regime-switching device, particularly studied by Richard Day, is proposed and applied to a Harrod–Minsky macro model. Three results are worth mentioning. The detection of nonlinearities in the U.S. Phillips curve leading to breaks in the curve; the ability of the model to generate robust bounded fluctuations, in which both Phillips curve loops and distributive loops can arise; the presence of both wage-led and profit-led distributive loops in the same model with different combinations of real and monetary parameters that can generate complex dynamics.